The mainstream narrative about "recovery" from the financial crisis is a giant con job. And nowhere does the mendacity run deeper than in the "banks are fixed" meme---an insidious cover story that has been concocted by the crony capitalist cabals that thrive at the intersection of Wall Street and Washington.

So this morning comes yet another expose in the Wall Street Journal about the depredations of Bank America (BAC). Not surprisingly, at the center of this latest malefaction is still another set of schemes to grossly abuse the deposit insurance safety net and enlist the American taxpayer in the risky business of financing high-rolling London hedge funds.

In this case, the abuse consisted of BAC funded and enabled tax avoidance schemes with respect to stock dividends-----arrangements which happen to be illegal in the US. No matter. BAC simply arranged for them to be executed for clients in London where they apparently are kosher, but with funds from BAC's US insured banking entity called BANA, which most definitely was not kosher at all.

As to the narrow offense involved----that is, the use of insured deposits to cheat the tax man----the one honest official to come out of Washington's 2008-2009 bank bailout spree, former FDIC head Sheila Bair, had this to say:

“I don’t think it’s an appropriate use........ Activities with a substantial reputational risk... should not be done inside a bank. You have explicit government backing inside a bank. There is taxpayer risk there.”

She is right, and apparently in response to prodding by its regulator, BAC has now ended the practice, albeit after booking billions in what amounted to pure profits from these illicit trades.

But that doesn't end the matter. This latest abuse by BAC's London operation is, in fact, just the tip of the iceberg-----the symptom of an unreformed banking regime that is rotten to the core and that remains a clear and present danger to financial stability and true economic recovery. And not by coincidence there stands at the very epicenter of that untoward regime a $2 trillion financial conglomerate that is a virtual cesspool of malfeasance, customer abuse, operational incompetence, legal and regulatory failure, downright criminality and complete and total lack of accountability at the Board and top executive level.

In short, BAC's six-year CEO, Brian Moynihan, is guilty of such chronic malfeasance and serial management failure that outside the cushy cocoon of TBTF he would have been fired long ago. Indeed, it is hard to believe that he would have survived very long even running a small chain of car washes in east Nebraska.

Since 2009, in fact, BAC has been the number one employer of criminal and regulatory defense attorneys in the USA and the armies of accountants, consultants, forensic specialists, etc. which support them. So vast is the dragnet of lawsuits and legal actions that have been brought against it that BAC's defense team amounts to an entire industry that should have its very own SIC code at the Commerce Department's data mills.

Already BAC has agreed to a stupendous disgorgement of fines, settlements and penalties that totals upwards of $100 billion. These stem not only from the mortgage abuses, on which its Countrywide subsidiary was a lead perpetrator, but nearly every other aspect of its banking operations as well. The pejorative term "bankster" does well and truly apply perfectly to the BAC house of malfeasance and corruption.

So the topic at hand is not dividend-tax-trading strategies, but why Brian Moynihan still has a job; and why a monumentally reckless, abusive and predatory behemoth like BAC even exists in the first place.

In addressing those questions we get to the meat of the matter. That is, the urgent need to repudiate the "banks are fixed" meme and to replace it with a sweeping new regime based on a super-Glass Steagall operational and regulatory framework. Moreover, this new deal must start with the recognition that the banking sector is vastly bloated, inefficient and destructive owing to the erroneous predicate that ever more debt is the lynch-pin of capitalist growth and prosperity.

Indeed, the only reason that-----six years after what is claimed to have been a near Armageddon event-----we are still plagued with TBTF, the regulatory monstrosity known as Dodd-Frank and the continuing tenure of the likes of BAC and Brian Moynihan is the whole misbegotten notion that America's $17 trillion economy can't do without cheap and easy debt; and that main street jobs and prosperity require more and more of it each and every quarter.

At the end of the day, it is the false belief in the debt elixir that undergirds the inexhaustible pettifoggery and cowardice displayed by Washington politicians and regulators alike when it comes to fixing the banks. The latter simply threaten a lenders' strike, and any resolve to get to the root of the problem promptly dissolves.

A hint as to the true nature of the banking problem is evident from the whistleblower's narrative that the WSJ has pieced together. The offending activities took place at Merrill Lynch's "prime broker" offices in London---and that kind of broker's office, of course, deals not with dentists and barristers but the billionaire titans of the global financial casino. Likewise, the insured deposits from BANA which were transported across the pond did not involve a mix-up down in the bowels of the bank. The funds were transferred on orders from BAC's top executives at the holding company level. As the WSJ succinctly explained:

One afternoon in February 2011, bankers, traders and others crowded into a Bank of America auditorium in London for a “town hall” meeting. Executives announced that they were changing the way they loaned money to certain clients, according to people who attended. The money for the loans now would come through BANA rather than Merrill Lynch International.

John Addis, an investment-banking executive, told attendees that increasing the use of lower-cost cash would give Bank of America a new edge over competitors. He and other executives said the funding would allow the bank to extend more loans to more hedge funds, including those with hard-to-sell investments, in turn generating more profits for the bank, according to internal documents and people involved in the discussions.

In 2011 and 2012, executives told employees to shift hedge-fund and trading clients into BANA-originated loans, according to emails.

“Given funding costs in [Merrill Lynch International] can we make sure all new clients, where possible, are loaded right on to bana? Where we can’t I’d like to understand why,” a senior investment-banking executive, Sylvan Chackman, wrote in an email to employees in January 2012.

Mr. Addis and Mr. Chackman are among the architects of Merrill Lynch’s dividend-tax-trading strategies.

Here's the thing. Never, ever should an insured deposit bank be operating a prime brokerage subsidiary in the wild west arena of the London financial markets. Stated differently, it is absolutely nuts that BAC even owns Merrill Lynch, and its is even more preposterous that it does so because its former executives were forced to acquire Merrill Lynch at the point of a gun in December 2008.

The gunslingers, of course, were the two highest economic officials in the land, Ben Bernanke and Hank Paulson. And the latter were commanding this action in pursuit of a crony capitalist scheme to rescue Wall Street and prevent economic justice and efficiency from happening. That is, the shotgun marriage of BAC and Merrill was designed to prevent Mr. Market's determination to liquidate the utterly bankrupt and corrupt gambling house that Merrill Lynch had become in the run-up to the so-called financial crisis.

Self-evidently, the scheming to abuse and arbitrage the deposit insurance safety net chronicled above would not have happened had Glass-Steagall never been repealed in the first place. Indeed, the great financial statesman, Senator Carter Glass, had been totally opposed to deposit insurance owing to the inherent moral hazard and potential for abuse. He had therefore reluctantly embraced it in the 1933 act that bears his name only on the condition that investment banking and deposit banking be explicitly and forever kept separate.

Unlike the debt enthralled statists of the present era----such as Bernanke, Paulson, Geithner and all the rest of the Obama entourage----Senator Glass knew that gambling and banking do not mix; and that an endless steam of Sylvan Chackman's would arise and order that "we make sure all new clients, where possible, are loaded right on to bana."

Actually, however, mere restoration of the old Glass-Steagall is not nearly enough. A banking regime that can produce $100 billion worth of sanctions against a single institutions needs to be replaced root and branch. If not, it is only a matter of time before the next contagion of London Whales and tidal wave of toxic products and trades arising from Wall Street's financial meth labs triggers another financial panic and meltdown.

So forget Dodd-Frank; it is a crony capitalist regulatory puzzle palace that will not do one bit of good and is actually providing the anesthesia that keeps Washington sleepwalking--- until the next crisis. By contrast, a super-Glass/Steagall would entail a legislated breakup of the multi-trillion behemoths like BAC; a sharp rollback of FDIC insurance to only "narrow" deposit banks; the elimination the Fed's discount window privileges for any financial institution involved in trading, underwriting and proprietary risk-taking; and the end of discretionary interest rate pegging and open market operations at the Fed.

The latter point, in fact, is the sine qua non of true banking reform. Leave it for another day to document that our debt saturated economy------with $60 trillion of credit market debt outstanding representing an unsustainable leverage ratio of 3.5X national income---does not require more and easier credit to rejuvenate growth and prosperity.

But given that readily demonstrable proposition, there is no point whatsoever in perpetuating ZIRP and the Fed's long-standing and destructive regime of financial repression. As I demonstrated yesterday, the major consequence has been a massive transfer of income---upwards of $250 billion per year----to the banking system from the hides of savers and depositors.

The relevance here is that BAC and most of the other giant financial conglomerates would be insolvent without these arbitrary transfers. Given its $1.1 trillion deposit base, the Fed's financial repression probably reduced BAC funding cost by at least $30 billion last year compared to a free market pricing environment. And, no, in the face of free market interest rates, BAC would not have automatically made up the difference via higher yields on its loans and assets.

The fact is, BAC's loan book today is smaller than it was on the eve of the crisis because US households and businesses have reached a condition of "peak debt". Accordingly, in a free market the current central bank driven deformation of pricing would be unwound. Interest rates on savings would rise more than yields on borrowings because demand for market rate debt would fall sharply.

Stated differently, BAC is solvent only because its earnings have been indirectly manufactured by the monetary central planners in the Eccles Building. Indeed, its $11.4 billion of reported earnings for 2014 pale in comparison to the Fed's $30 billion gift on its deposit cost. Yet however a free market in interest rates might ultimately shake out, this much is certain. There is not a chance that the $60 billion in dividends BAC has paid out over the last 10 years could have been earned in an honest free market.

That would have been especially true in the absence of FDIC insurance. The latter is another subsidy to its income statement---to say nothing of the demonstrated moral hazard it generates, as reinforced once again by today's story on BAC's London tax dodge caper. And the argument that blue haired widows and financially uninformed wage workers need the protection of universal deposit insurance just doesn't cut it.

The real super-Glass Steagall reform that is needed is to restrict FDIC coverage to "narrow" deposit banking. This means that any bank wishing to offer FDIC insured accounts would be strictly prohibited from engaging in trading, underwriting or agenting any business in securities, derivatives, commodities and whole loans that it had not originated.

Needless to say, it isn't the purportedly benighted blue-haired ladies and wage workers who demand these services from their banks in any event. So a restriction of deposit insurance---if we must have it at all-----to "narrow" deposit banks would not inconvenience the "little guy" one wit.

The larger point is that "banks" of the BAC variety are not even remotely free market institutions---notwithstanding the fatuous propaganda pitches of their K-Street agents. In fact, the presence of deposit insurance, the availability of the Fed's discount window and the legal immunities provided by their fractional reserve banking charters-----make them wards of the state. And, as Carter Glass well knew, only strict limits on their ability to exploit these privileges can prevent a breakout of reckless risk-taking.

So what real banking reform would do is strip the giant banks like BAC, Citi, JPM, Wells Fargo, and the next tier as well, of the deposit cost subsidies which accrue from Fed financial repression, as well as their access to the discount window and FDIC insurance. The latter privileges would be reserved for narrow community banks that take deposits and make whole loans to local businesses and households---loans that would be kept on their books until maturity or repayment.

By the same token, once the mega banks were stripped of these state conferred privileges and subventions, they would be free to operate any financial business they wished. And they would be free to employ whatever balance sheet arrangements their at-risk depositors, bond investors and equity holders would permit.

The banking behemoths keep demanding less government interference and regulation. Well, here's the free market they wish for.

Getting from here to there requires one more super-Glass-Steagall feature. The nation's handful of mega banks have operated so long in the corrupt world of bailouts and state conferred moral hazard that they are inherently unstable and prone to the errors and abuses for which BAC is the poster boy. Moreover, none of them would have gotten to their current size without the serial M&A campaigns and roll-ups that were enabled by the current rotten banking regime. Giant, multi-trillion banking conglomerates would not arise in a free market because there are simply no demonstrated economies of scale in banking beyond a few hundred billion in balance sheet footings, at most.

So cap their size at 1% of GDP or about $200 billion during the transition period when they are being weaned from their state crutches, subsidies and privileges and finding their sea-legs in the free market.

At the end of the day, cesspools like BAC need to be completely drained. And the only way to get them out on the free market where this could actually be accomplished is through the enactment of the kind of super-Glass-Steagall here described.

Obviously, our corrupt crony capitalist system of governance will never permit this to happen. So we will have endless WSJ exposes like today's story. And we will also have even greater financial crises than September 2008. That much is already baked into the cake.

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